Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152729
Authors: 
Ewerhart, Christian
Cassola, Nuno
Ejerskov, Steen
Valla, Natacha
Year of Publication: 
2003
Series/Report no.: 
ECB Working Paper 295
Abstract: 
On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its “neutral” benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold.
Subjects: 
euro
monetary policy instruments
operational framework
refinancing operations-
JEL: 
E43
E52
Document Type: 
Working Paper

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